This article is for general information only. It does not constitute financial advice. Lending rates, terms, and conditions vary by lender and borrower circumstances. Always seek independent financial advice before making borrowing decisions.
There is a cost to being small in Australia, and it shows up every month on your loan statement.
Reserve Bank of Australia data confirms that small and medium businesses consistently pay a higher interest rate on business loans than large corporates. The gap has narrowed over the past two years, but it has not disappeared. And for most business owners, the premium they pay adds up to thousands of dollars per year in extra interest that a larger competitor simply does not face.
This article breaks down the actual lending rate data from the RBA, shows what the premium costs in real terms, and explains why it exists and what you can do about it.
The RBA publishes monthly data on business lending rates through its Statistical Table F7. This table breaks down weighted average variable interest rates by business size, covering loans from banks and registered financial corporations that account for over 95% of total business credit in Australia.
As of late 2025, the spread between outstanding variable lending rates for SMEs and large businesses sat at approximately 1.5 to 1.8 percentage points. This is a historically low level, though still a material premium. The February 2026 cash rate increase to 3.85% pushed variable rates back up, with major lenders passing the full 0.25% increase through to business borrowers.
Current small business variable rates for secured lending sit in the range of approximately 7.5% to 9.5%, depending on the lender, loan size, and type of security offered. Unsecured small business lending typically attracts rates of 11% or higher, reflecting the additional risk lenders take on without property backing. Large business variable rates remain lower, typically in the range of 5% to 6%.
That spread might sound modest on paper. It is not modest on a loan.
On a $500,000 variable rate business loan, a 1.5 percentage point premium adds $7,500 per year in additional interest. At the wider end of the current spread (1.8 percentage points), that rises to $9,000. Over five years, the cumulative penalty ranges from $37,500 to $45,000 in extra cost that a large business borrowing the same amount does not pay.
On a $1 million facility, the annual penalty sits between $15,000 and $18,000. Over five years, up to $90,000.
For a business turning over $2 million to $5 million per year with margins of 10% to 15%, that penalty represents a meaningful chunk of annual profit. It is money that could fund a new hire, invest in equipment, or simply stay in the owner's pocket.
And this calculation only captures the rate difference. It does not account for the establishment fees, ongoing facility fees, covenant monitoring charges, and valuation costs that small businesses frequently face on top of the rate premium. These ancillary costs can add several thousand dollars per year, further widening the effective cost gap between SME and corporate borrowing.
The RBA has noted that the SME to large business lending spread has narrowed to a historically low level in recent years. There are three drivers behind this, and not all of them reflect genuine improvement for small business borrowers.
First, the Australian Prudential Regulation Authority reduced capital requirements for banks on SME loans from January 2023. Lower capital requirements reduce the cost for banks to fund SME lending, and some of that saving has been passed through as lower rates. This is a real structural improvement.
Second, competition in the SME lending market has increased. Multiple major banks have signalled a strategic focus on growing their business lending books, non-bank lenders have gained market share (particularly for smaller loans), and broker activity for business loans has risen. More competition means better pricing for borrowers.
Third, and this is the part that matters for interpretation, the RBA changed its business size definitions in April 2023 and again in June 2024. These changes reclassified some loans that were previously counted as large business lending into the SME category. Because those reclassified loans carried lower interest rates (they were originally large business loans), they mechanically pulled down the average SME rate. The spread narrowed partly because the measurement changed, not because every SME got a better deal.
The practical takeaway: the headline spread compression overstates the improvement that individual small business owners have experienced. If you have not renegotiated your rate recently, you may still be paying closer to the old spread than the new one.
The interest rate premium is not arbitrary. Banks charge SMEs more for lending because their internal risk models assess small businesses as more likely to default than large corporations. This assessment is based on several factors.
Small businesses have more variable revenue streams. RBA analysis shows that small businesses experience a wider range of annual revenue changes than larger businesses, making future cash flows harder to predict. A business with volatile income is a riskier lending proposition.
Small businesses are more concentrated. A large corporation typically has diversified revenue across multiple products, geographies, and customer bases. A small business often depends on a handful of clients or a single market. If one major customer leaves, the business can be in serious trouble quickly.
Small businesses have fewer assets to secure loans against. Banks require collateral, and for many SMEs, the only asset of sufficient value is the owner's residential property. Approximately 48% of all small business credit in Australia is secured by residential property. Businesses that cannot or will not offer their home as security face higher rates, smaller loan amounts, or both.
Banks also hold more regulatory capital against SME loans than large business loans. Even after the 2023 APRA reductions, the capital charge for SME lending remains higher, and that cost gets embedded in the interest rate.
You cannot eliminate the structural premium, but you can minimise it. Here are the most effective levers.
Benchmark your rate. Many small business owners accept whatever rate their bank offers without comparison. With increased broker activity and more non-bank options available, there is more room for negotiation than most owners realise. The RBA's own Panel members have noted more frequent rate negotiation by customers in recent years.
Get your financials in order. Banks price risk. If your financial reporting is clean, timely, and shows consistent profitability and cash flow, you present as a lower-risk borrower. Businesses with poor or late financial records pay for the uncertainty in their interest rate.
Understand your collateral options. The traditional model of pledging residential property is not the only path. Non-bank lenders increasingly offer equipment-secured and unsecured lending, and the availability of credit secured by non-physical assets has improved. These products carry higher rates than residentially secured loans, but they remove the personal risk of putting your home on the line.
Consider your loan structure. The mix of variable and fixed rate debt, the loan term, and the facility type all affect your total borrowing cost. A business with strong cash flow forecasting can make informed decisions about when to fix rates and how much variable exposure to carry.
Use a finance professional. Having someone who understands your numbers, can prepare lending-ready financials, and can negotiate on your behalf is one of the most effective ways to reduce your borrowing costs. The difference between a well-prepared and a poorly-prepared loan application can be significant in both approval likelihood and the rate offered.
Based on RBA data, Australian SMEs typically pay 1.5 to 1.8 percentage points more on variable rate business loans than large corporates. The exact spread varies by lender, loan size, and security type, but the structural premium has persisted for decades.
Banks assess small businesses as higher default risk due to more variable revenue, less diversification, and fewer assets available as collateral. Banks also hold more regulatory capital against SME loans, which increases the cost of funding those loans.
The gap has narrowed to historically low levels, driven by increased competition, lower APRA capital requirements, and changes to how business size is measured. However, the premium still exists and still costs thousands of dollars per year on a typical business loan.
Current small business variable rates for secured lending range from approximately 7.5% to 9.5%, depending on the lender, loan size, and borrower profile. Unsecured business loans typically start at 11% or higher. Residentially secured loans attract the lowest rates.
Benchmark your current rate against alternatives, ensure your financial reporting is clean and current, use a broker to increase competition, and consider the full range of lenders including non-banks. Businesses with well-prepared financials and strong cash flow consistently secure better terms.
The share of business loans originated through brokers has increased in recent years, and the RBA has noted that broker activity supports competition and helps match borrowers with suitable lenders. For most SMEs, engaging a broker or finance professional is worth exploring.
RBA Statistical Table F7: Business Lending Rates: https://www.rba.gov.au/statistics/tables/
RBA Statistical Table D14: Lending to Business by Business Size and Interest Rate Type: https://www.rba.gov.au/statistics/tables/
RBA Bulletin October 2025: Small Business Economic and Financial Conditions: https://www.rba.gov.au/publications/bulletin/2025/oct/small-business-economic-and-financial-conditions.html
RBA Bulletin October 2024: Small Business Economic and Financial Conditions: https://www.rba.gov.au/publications/bulletin/2024/oct/small-business-economic-and-financial-conditions.html
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